South Korean Refiners Post Strong Q2 Profits Amid Middle East Tensions

South Korea's four leading oil refiners, SK Energy, GS Caltex, S-OIL, and HD Hyundai Oilbank, achieved a substantial turnaround in their refining businesses during the second quarter. Despite government price controls, geopolitical tensions in the Middle East drove up refining margins, leading to a combined operating profit of 4.67 trillion won (approximately $3.5 billion). This marks a dramatic recovery from a 1.38 trillion won operating loss in the same period last year.

The strong performance extended to the first half of the year, with cumulative operating profits for the refining segment reaching 9.43 trillion won. All four companies transitioned from losses in the second quarter of 2022 to profitability this year. SK Energy's refining division swung from a loss of 465.6 billion won to a profit of 651.2 billion won, while GS Caltex saw its refining segment profit jump to 2.19 trillion won from a 340 billion won loss.

The surge in profits was primarily attributed to elevated refining margins. Disruptions in Middle Eastern refineries and logistical challenges in the Strait of Hormuz tightened the supply of petroleum products like gasoline and diesel, causing their prices to outpace crude oil costs. S-OIL, for instance, reported a significant increase in its kerosene and diesel spreads against Dubai crude, rising to $62.5 and $62.7 per barrel, respectively, in the second quarter from $36.8 and $35.9 in the first.

Rising oil prices also boosted profits through increased inventory valuation. SK Energy recorded 562.3 billion won in inventory-related gains, accounting for 86% of its operating profit. S-OIL and HD Hyundai Oilbank also cited inventory gains as a key factor. However, the sustainability of these gains is uncertain, as falling oil prices could reverse these effects. Some companies already saw a moderation in the second quarter, with S-OIL's inventory gains shrinking significantly.